Question

Accountants tell a franchise owner that she earned $30,000 in profits last year. The owner knows that most of her business acquaintances earned at least $70,000 in profits is similar franchises. Which of the following is true? Her firm earned an economic __________.

AProfit of $30,000
BProfit of $100,000
CLoss of $100,000
DLoss of $40,000

Answer 1

The franchise owner's firm experienced a loss of $40,000.

Step-by-step explanation:

Accounting profit is the total revenues minus explicit costs. In this case, the franchise owner earned $30,000 in profits last year, so her accounting profit is $30,000. However, economic profit takes into account both explicit costs and implicit costs. Implicit costs are the opportunity costs of using resources for one purpose instead of another.

Since the owner knows that most of her business acquaintances earned at least $70,000 in profits in similar franchises, it suggests that her implicit costs are higher than $30,000, resulting in a lower economic profit or even a loss.